Florida concludes recorded videos subject to communications tax

The Florida Department of Revenue recently released two Technical Assistance Advisements (TAAs) that consider the application of the Florida Communications Services Tax (CST) to celebrity video messaging services and online courses. In the first TAA, the Department concluded that the service of providing customized and personalized pre-recorded video messages by celebrities constitutes video services subject to CST.¹ In the second TAA, the Department determined that CST applies to the entire tuition price of online courses that have a video component.²

Imposition of CST  

Florida and many of its municipalities impose CST on purchases of communications services sold at retail when the services: (i) originate and terminate in Florida, or (ii) originate or terminate in Florida and are charged to a Florida service address, unless a specific exemption applies.³

The CST contains several definitions that are important in determining whether a particular service activity may be subject to the tax. The term “communications services” is defined to include the “transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including video services, to a point, or between or among points,” by or through any medium or method, regardless of the protocol used for such transmission or conveyance.⁴ Accordingly, service offerings that are classified as “video services” may be subject to the CST, while service offerings outside the scope of the term “communications services,” like “information services” are not taxable.

The term “video services” incorporated within the definition of “communications services” includes “the transmission of video, audio, or other programming service to a purchaser, and the purchaser interaction, if any, required for the selection or use of a programming service” over facilities owned by the provider or a third party. The definition “includes basic, extended, premium, pay-per-view, digital video, two-way cable, and music services.”⁵

“Information services” (which do not include a video service) are defined as “the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, using, or making available information via communications services.”⁶ The term includes “data processing and other services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission to a purchaser whose primary purpose for the underlying transaction is the processed data or information.”

The CST is measured on the “sales price,” which is the “total amount charged . . . by a dealer for the sale of the right or privilege of using communications services in [Florida], including any property or other service . . . which is part of the sale and for which the charge is not separately itemized on a customer’s bill or separately allocated.”⁷

Celebrity messaging services

In the first TAA, the Department determined that CST applies to the taxpayer’s various celebrity messaging services. The taxpayer provided to its customers customized and personal messages that are pre-recorded by entertainers, musicians, athletes, or other social media personalities (“talent”). Customers explore the taxpayer’s website or mobile application to browse available talent and their service offerings. As part of a request, the customers provide instructions so that the talent can customize the message. The taxpayer collects payment from the customers and transfers most of the payment to the talent, but the taxpayer retains a fixed percentage of the fees for its services. The customers then use their internet or mobile data plan to access and view as well as download or stream the video messages through the taxpayer’s website or mobile application. The taxpayer also allows customers to schedule live video calls or attend live events which are charged on a per minute basis. In addition, the taxpayer offers the service of sending direct messages to the talent. Finally, customers may pay a monthly fee for priority access to the talent.

The taxpayer argued that although the customers are buying a customized video, they are purchasing a personal service rather than the ability to stream or download a video. According to the taxpayer, the primary component of the product is the personal service of the talent creating the customer’s video message. The second component is the delivery of the video message, which the taxpayer argued was an information service. The taxpayer contended that it does not provide the telecommunications services needed for the customer to access its website or mobile platform and thus should not be subject to CST. The taxpayer also argued that if the taxpayer were subject to CST, the tax should be based only on the portion of the payment that the taxpayer retained. Similarly, the taxpayer alleged that the live video calls or events are comprised of personal and information services not within the scope of CST. The taxpayer argued that the direct messaging service was not subject to CST because it did not provide data services. According to the taxpayer, the monthly membership fee was for a personal or entertainment service not encompassed by CST.

In rejecting the taxpayer’s arguments, the Department determined that the taxpayer’s services were subject to CST because they met the statutory definition of “video services” by providing the “transmission of video, audio, or other programming service to a purchaser,” including “digital video.” Because the offerings meet the definition of video services, they could not be considered nontaxable information services. The definition of video service, unlike information service, does not have a test for the “primary purpose” of the transaction, and so the Department did not consider the underlying purpose of the video service as a personal service to be relevant. As a result, the offerings that include audio or video are taxable as “video services.” The Department also rejected the taxpayer’s argument that only the portion of the payment that it retained was subject to tax, because the sales price is the total amount charged for the sale of the right or privilege of using communications services.

Online courses

In the second TAA, the Department concluded that the entire tuition price of an online training course was subject to CST due to its video component. The taxpayer provides bar exam preparation courses that are offered in 46 jurisdictions on a custom learning platform. The preparation services include: (i) an adaptive calendar and progress monitoring function; (ii) outlines and lectures; (iii) practice multiple-choice questions; (iv) practice essays; (v) a personalized success team; and (vi) hardcopy materials. Approximately 10% of the students purchase a technology package upgrade that includes an iPad.

The taxpayer requested a ruling addressing the sales tax and CST treatment of several components of the service offering. The taxpayer successfully argued that the provision of hardcopy materials did not subject the entire tuition charge to sales tax. The charge for the hardcopy materials was not separately stated from the tuition charge. A student can complete the coursework and practice questions without using the printed material. The Department determined that the provision of hardcopy materials was inconsequential to its provision of online courses and deemed a service exempt from sales tax. Florida law exempts from sales tax “professional, insurance, or personal service transactions that involve sales of tangible personal property as inconsequential elements, for which no separate charge is made.”⁸

The Department decided that while the purchase of the technology package upgrade does not subject the entire tuition charge to sales tax, the upgrade does subject the entire tuition charge to CST. The charge for the iPad is considered part of the “sales price” for the communication services. Thus, the taxpayer’s total charge for tuition, which includes the provision of video services and the charge for the iPad, is subject to CST when provided to Florida service addresses.

Finally, the Department determined that the video component of the taxpayer’s online services subjected the entire price of tuition to CST. The taxpayer unsuccessfully argued that despite having a video component, its online courses are not taxable “video services,” but provide access to information using a communications service. In rejecting the argument, the Department explained that when the taxpayer receives consideration from students to access its online courses, which includes taxable video services, the taxpayer is selling communications services and is required to charge CST on the tuition charge when such amount is charged to a Florida service address.

Commentary

These TAAs effectively expand the scope of the CST, which should be of concern to businesses that provide services with a digital video component to their customers.⁹ Traditionally, Florida has not subjected digital goods and services to sales or other transactional taxes. Despite the lack of statutory, regulatory, or judicial action, the Department appears to be substantially increasing the application of the CST through its issuance of TAAs. In the first TAA, the taxpayer is providing a personalized messaging service by video that is substantially different from a traditional video service of offering standardized content to customers. The customization of the product is emblematic of a personal service delivered by video, and differs in scope from a video service that is not distinguishable in content from customer to customer. In the second TAA, the taxpayer’s offering of online courses with a video component makes the entire tuition amount subject to the CST, even though the taxpayer’s customers ultimately are obtaining the services as a means to pass the bar exam, rather than for the video service itself.¹⁰

The Department’s expanded application of the CST places a burden on taxpayers that may be collecting sales tax in other states and are not usually considered to be telecommunications providers. In some locations, the combined state and local CST rates are more than double the highest Florida sales tax rate. Accordingly, some taxpayers suddenly may be confronted with a substantially greater state and local tax obligation due to the expansion of the CST.

Taxpayers should consider the Department’s increasingly expansive view in this area as they envision the structure of their service-based products to Florida customers. In some situations, taxpayers whose product or service offerings involve digital video may consider seeking their own TAA from the Department, possibly distinguishing their services from those described in prior TAAs. Taxpayers also may decide to begin collecting and remitting CST, an option that brings a level of administrative difficulty, and as some taxpayers find, a competitive disadvantage to industry peers that may not be charging the tax. Given the Department’s position and the increasing number of specialized services that can be provided to customers in video format, controversies between the Department and taxpayers regarding the appropriate CST treatment of these types of “personal” or “information” service offerings could become more widespread.